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Using the WACC methodology to improve the assessment of projects in the french farming industry. Empirical evidences from farm's results of Isère

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par Anaël BIBARD
Grenoble Graduate School of Business - MBA 2012
  

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7.4 The WACC Methodology

The first limitation of this methodology is really easy to identify: this method, based on the CAPM, is really dependent on the beta of the company studied. However, the beta cannot be calculated for non listed companies, and it is necessary to extrapolate the results of listed companies to obtain an appropriate beta for the small and medium farming businesses studied in this paper. The other limitation of the method is directly linked to the first one: the market value of the firm should be estimated by its market capitalization. However, for non-listed companies this value cannot be calculated. The book value used in our research cannot replace fully the market capitalization, because it does not reflect the opinion of the market on the company.

The second limitation of this method is the size of the farms studied compare to the size of the listed companies used to calculate the betas. Even if a premium was added to the betas of the listed companies, it remains a bias not considered by the WACC methodology.

The last limitation is more linked with the choice of the expected return. It has been chosen on purpose to adopt the risk premium to estimate E(Rm) - Rf, in order to be able to compare the results of the two methodologies. However, it could have chosen to use the historical results of the farms from Isère of the first quartile (the 25% most performing farms).

7.5 Further Research Implications

First, there is a clear necessity to intensify the research about the optimal level of debt in Agriculture. Repeated measure statistical tests could be used to work deeper on the subject, in order to identify more clearly the optimal level of debt, but also to identify what are the other factors that have a strong impact on the financial performance of farms. It seems obvious that the productivity of farmers (number of hectares or cows per FTE) and the surface of the farm play a great role in the results. However, it is really hard to find quantitative research on the subject in France, at least researches that could be used easily by financial consultants.

The other further research implication is the necessity to test the methods presented here in the long run, in order to compare them. It would be interesting to follow many projects evaluated with the NPV method in order to see finally which method gave the most appropriate actualization rate. Moreover, other methods should be tested either to identify which ones should be chosen by practitioners. So far, this research tends to prove that the WACC methodology can be used by consultants, even if some theoretical limitations arose.

Finally, the same research methodology should be applied in other departments than Isère, with other specializations also. This would give further indications on the adaptability of the WACC methodology to the agricultural sector. It would allow also consultants to estimate the appropriate discount factors for farms specialized in fruits, wines or vegetables.

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